November 3, 2015

BULLISH TRENDS

BEARISH TRENDS

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11/02/15 03:22 PM EST

Cartoon of the Day: Hail Mary Bubble!

It's going to be very interesting to witness how this bubble will ultimately end. In many ways, what's going on today is actually worse than at the prior two U.S. stock market bubble tops of 2000 and 2007.

What Gold and Bond Prices Say About a December Rate Hike

During this brief excerpt from The Macro Show this morning, Hedgeye commodities analyst Ben Ryan and CEO Keith McCullough weigh in with their thoughts on current market signals and what they portend from the Fed.

Columbia Sportswear: Added to Short Bench. It's admittedly early to short COLM, especially in light of such healthy sales, inventory and margin trends that COLM reported last week. But...the company benefitted from two extreme winters, and the likelihood of a third is slim. Management says it does not need one. But with inventories already elevated in the channel, and with the likelihood of so many consumers already having stocked up on boots and puffy jackets in the past two years, we think order trends are more likely than not to slow (or margins weaken -- or both). As a kicker, the company has seen notable success with its boot/wedge business. We actually did not know that this was a 'thing', but by the sound of management on the conference call, they did not either. This will be a tough business for COLM to anniversary in another nine months. So all-in, it's early to short this one. But at 21x earnings and near 10-year trough short interest, we think this one is definitely bench-worthy.

M, TGT, WMT, KSS - Several retailers including Macy's, Target, and Toys R Us noting labor market tightness. The companies are taking steps such as increasing hours of current employees, and offering higher pay to attract seasonal employees.

A 5.2% unemployment rate and the largest retailer in the space taking up the ante chip on wages for entry level employees to the tune of $5400 = a difficult labor market anyway you slice it. So many retailers seem to have blown this off thinking that it’s really not a big deal, but rather a WMT PR stunt that won’t affect them. It may be a stunt, but when the biggest retailer in the world raises the minimum wage to $10.00, it is a big deal for everybody. We’ve heard half a dozen CEO’s say “We already pay above minimum wage, so it’s not a big deal.” Or in Kohls’ case, “Our employees love to work, so we don’t have to pay them more.” We understand that the companies can’t negotiate wage increases with employees through Wall-Street conference calls. But there will be an impact to almost everyone who sells to the low/mid-level consumer. That's kicked into high gear in October as retailers prepare for Holiday.

AMZN - Amazon announces Black Friday deals from now until Dec 22nd. Prime members to have exclusive early access to more than 30,000 lightning deals.

CVS - Omnicare was served with an administrative subpoena by the DEA. The subpoena seeks documents related to controlled substance policies, procedures, and practices at eight pharmacy locations from May 2012 to present.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH

Easy central bank policy continued to help offset economic growth concerns last week. While U.S. third-quarter GDP came in at a low 1.5%, it only added to investor optimism about the Federal Reserve keeping rates near zero. Investor reaction was such that the TED spread fell an impressive -7 bps to 25. Additionally, Chinese bank CDS continued to tighten while the Chinese interbank rate dropped another -11 bps following the PBOC announcing it would cut rates and reserve requirements. This was in spite of the slowest GDP growth since the financial crisis. Our warning of caution: growth is slowing.

Given investors' positive reaction to central bank policy, our heatmap below is predominantly green for both the short and intermediate terms. Long-term readings are mixed.

1. U.S. Financial CDS – Swaps tightened for 13 out of 27 domestic financial institutions. Reaction was positive to the Federal Reserve's announcement that it would keep rates near zero and the subsequent low GDP reading of 1.5% with the median CDS spread tightening from 78 to 76 bps.

Tightened the most WoW: MMC, MBI, AXP Widened the most WoW: CB, ACE, AIG Tightened the most WoW: MMC, TRV, ALL Widened the most MoM: CB, RDN, GNW

2. European Financial CDS – Swaps mostly widened in Europe last week, although the movement was muted. The median spread held steady at 75 bps.

3. Asian Financial CDS– Chinese financial swaps continued to tighten, following the PBOC's decision to cut interest rates and reserve requirements in the prior week.

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. However, Portuguese swaps widened as the country's prime minister was sworn in for a second term as the head of a minority government that is expected to last less than two weeks given challenges from the socialist majority.

9. CRB Commodity Price Index – The CRB index was unchanged, ending the week at 196. As compared with the prior month, commodity prices have increased 0.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 12 bps.

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